Friday, 31 May 2013

Companies Focus – Global Autos 11 – “Coupled Ratios” Analysis

The previous review provided a snap-shot of the stock-market performance of the 'Global 11' automotive producers, over the past year, 6 months, 3 months, 1 month and 5 day periods. It also recognised the importance of macro-effect headwinds and tailwinds, and the involvement of trend- traders and 'early-bird' long-termists behind stock vitality (and specifically volatility).

This web-log returns to the now more established company fundamentals perspective of 'Coupled Ratios', the simple but insightful, graphically depicted, four-fold viewpoint of a single company set amongst its sector peers.

To re-iterate, the methodology devised by investment-auto-motives uses complementary statistical measures and balance sheet/cash book figures, to provide a set of four dual-aspect graphs.

Each graph simply conjoins two standardised assessment criteria across both 'x' and 'y' axis, within which an intentionally conservative 'investment window' is shown. Its own frame governed by the standardised metrics pertaining to the lower-risk investment spectrum.

The assessment criteria spans :

1. Market Valuation Ratios

2. Profitability Level Ratios

3. Liquidity Level Ratios

4. Debt Level Ratios

This method, whilst spread-sheet originated, provides a most useful overview when graphically depicted, typically illustrating the respective leaders, middlings and laggards.

The information sourced obviously comes from real-time/near-time data providers and Q1 2013 earnings reports (Q4/FY for Japanese firms).

It must be stated that given the global slowdown in vehicle sales over the last 3-6 months most global VMs (especially those most European exposed) have declined from providing what was previously a normative (very basic) level of financial detail; especially so regards the critical issue of operational cashflows and capital expenditure.

In order to partially overcome this vacuum, assumptions have been made where possible using FY and QoQ 2012 intelligence to provide substitutional / proxy data; so providing loose approximation where seen to be feasible. Where not available or convincing 'carry-over' data from Q4 2012 has been used.

Given the improving domestic market situation for the Detroit 3, the offerings from US firms have in contrast been generally quite detailed to highlight the 'rising tide'. This competitive advantage enhanced by the PR push regards current and new-stream pick-up truck manufacturing capacity, itself a “moat-like” market feature of the Detroit inhabitants.

It should also be stated that whilst Q1 2013 figures are hardly fresh toward the end of May, after April and May company reporting, the notion is that stock-markets have during this period are 'settled' well after any pre-reporting and post-reporting stock surges and decline

1. Market Valuation Ratios -

This measure combines P/E and P/B figures.

Those companies placed within or very near the extremes of the allotted 'investment window' are:

VW edging slightly higher in p/e terms but static on p/b (at 3.74, 0.95 respective 'co-ordinates'), Hyundai Motor (at 1.19, 0.21) marginally increasing both values, and Peugeot SA seeing marked positive movement. PSA's improvement seemingly stemming from early-phase investors expecting a mid-term turnaround, whereas VW and Hyundai are fundamentals driven.

Previously on the borders of this investment window sat Renault and Daimler, however even with 'over-cast' Q1 corporate presentations, the recent spell of market appetite for cyclical stocks (rading away from over-priced defensives) has propelled Renault's p/e level and for Daimler both p/e and p/b measures. Renault (at 9.06, 0.66) and Daimler (at 9.7, 1.3)

Floating beyond the overtly cautious investment window, also at around the x10 p/e level sit BMW (at 9.28, 1.47), Ford (at 10.03, 3.31) and GM (at 11.27, 1.69), each seeing their p/e values raised, less so by impact of the 'cyclicals play', more so from brighter North American vehicle sales expectations.

Even with the early influence of the 'Abenomics Effect' that dramatically boosted the TSE indices, on the NYSE Toyota has infact seen a deflation of its p/e and slight inflation of p/b; this seeming stasis the outcome of recent income and profits having already been 'baked-into' market valuation levels (at 15.61, 1.28). Honda (at 15.22, 1.13) saw its p/e level at p/b levels lowered slightly likewise.

Lastly, the influence of Italy's domestic political circumstances apparently extracted from 'dead-lock' and constantly improving sales picture at Chrysler saw both FIAT's p/e and p/b levels shift considerably (at 29, 1 from 16, 0.6), the overtly ballooned present p/e measure very probably the outcome of Italian, European and Asian institutionals happy to wait for a much improved future Italian, EU and Brazilian vehicle sales environment and so an eventually re-balanced FIAT valuation.

2. Profitability Level Ratios -

The measures herein are Profit Margin % and Return of Equity %.

Well within the 'investment window' sits VW, Hyundai and BMW. VW holds valuation 'co-ordinates' (at 10.74, 27.6), Hyundai (at 9.58, 18.87), BMW (at 6.65, 16.84).

Daimler (at 4.66, 13.57) moves to just the wrong-side of the window parameters as it slipped on both counts.

Also outside but on an improvement heading is Toyota (at 4.36, 9.09), Renault (4.29, 7.07), GM (at 4, 15.2) and Honda (at 3.72, 8.07).

Ford stayed effectively static, seeing slight RoE decline (at 4.27, 34).

FIAT SpA (at 0.28, 11.3) showed a newly profitable status thanks to the booking of Chrysler income.

Peugeot (at -9.04, -45.73) appears static, this presently dour position reflecting a no corporate numerics update since FY2012, and its own recognition of its broad exposure to the still under-performing macro-conditions of Europe.

3. Liquidity Level Ratios -

The measures used are Current Ratio and Operational Cashflow Ratio.

[NB When necessary the 'CFR' is derived from the acknowledged calculation for Operating Cashflow...OCF = EBIT – (CapEx + financial investments costs).

Seen within the investment window are: VW (at 1.07, 8.4), Hyundai (at 1.06, 4.0) and BMW (at 1.08, 2.7). VW saw its current ratio remain static whilst its op c-f grew sizeably, Hyundai saw a slight rising of its current ratio and marked decline in op c-f, whilst BMW remained effectively in-situ, with slight rise of current ratio.

Outside the window, but with noted improvement toward investment heading were Toyota (at 1.07, 1.46) and GM (at 1.29, 1.56).

Of substantial change were Honda (at 1.3, -1.9) and FIAT (at 1.46, -1). Both were previously within the window, but now far removed as a result of poor op c-f positions, though static on current ratio standing. FIAT's cash-flow situation much aggrevated by a combination of lacklustre global income (exempting Chrysler) combined with ongoing CapEx demands. Whilst Honda's op c-f position (here shown in US$), dramatically down from previous calculated assumptions, is due to the massive devaluation of the Yen and ongoing CapEx requirements inside Japan to help boost the domestic economy.

Likewise Daimler (at 1.16, -0.86) previously outside the window, remained even more so, seeing its op c-f deteriorate as a result of declined income across nearly all its divisions.

Without detailed nor reasonably modelled op c-f figures as guidance, Peugeot (at 1.04, ???) sees its current ratio static and is assumed to have improved its c-f given primary fixed costs reforms in labour rates and critically important UK and EU sales of the new 208 car.

4. Debt Level Ratios -

The measures herein are Liquidity and Debt levels. To aid immediate assessment, the graph is segmented into five distinct areas, pertaining to liquidity to debt ratios of at or under 1:1, 1:2, 1:3, 1:4 encompassing the 'investment window' and an area beyond.

Within the window, GM slips effectively into the 1:2 realm (at $27.9bn, $52.3bn), Peugeot (at 17.5, 32.55) climbs to sit on the lower cusp of 1:2, FIAT remains in the 1:2 arena (at E11, E29.28), Hyundai (at E13.65, E31.63) remains in-situ the 1:3 sector, Renault (at 11.35, 33.02) stays just inside the 1:3 cusp.

Just within the 1:4 investment parameters are :VW (at E22.5, E99.62), Ford (at E24.18, E107.6), Honda (at $15.33, $62.19) and Renault (at E11.35, E33.02) stays effectively static

Daimler (at E17.7, E78.74) sits just outside this cusp, whilst Toyota (at $30.73, $179.57) is past the 1:5 realm, and BMW (at 11.3, 70.44) is beyond 1:6 territory.

Results -

Valuation Ratios :

VW, Hyundai and Peugeot

Profitability Ratios :

VW, Hyundai and BMW,
(though GM, Daimler, Renault and Honda tentatively approach)

Liquidity Ratios :

VW, Hyundai, BMW
(though GM and Toyota tentatively approach)

Debt Ratios:

FIAT, GM, Peugeot, Hyundai.

Ranked Orders -

The following shows the obvious ranked order of 'investment window' appearances.

Four Windows: Hyundai * (see Post Script)
Three Windows: VW
Two Windows: BMW, Peugeot
One Window: GM, FIAT

Conclusion -

Look closely at the positional dynamics of the Automotive Global 11 and between FY2012 and Q1 2013, and the general picture appears far more muted than in previous incarnations of 'Coupled Ratios' analysis.

This reflects the emergence of (for now at least) a relatively calm macro environment free of man-made financial implosions and high-impact natural disasters.

Thus whilst in certain instances on specific measures there has been sharp movement of specific player's positions – so perhaps sharply affecting their individual multi-aspect standings - the general graphically depicted appearance of investor mood, suggests a period of greater stability.

Something very much required at the beginning of the new western economic transformation period.

Post Script -

Whilst investment-auto-motives seeks to provide s clear a picture as possible regards the 'botttom-up' micro-level picture of companies' fundamentals, as ever the importance of 'top-down' macro-level issues has potential major influence.

This obviously seen by the after-shock effects of the 2008 financial crisis, the European sovereign debt crisis, the medium-term 'real-economy' effect of (necessary) austerity and reform policies, and the more recent slow-down in the big EM countries.

This massive economic disruption played to the advantage of the few automakers that could leverage a global manufacturing and sales foot-print whilst offering value-priced vehicles and enjoying the periodically 'lost competition' of floundering old-guard producers.

However, as the western world slowly returns to a more normalised 'new-norm', those firms that were between 2008 to date very well placed to generate success will find similar future success hard fought to be maintained, thus raising the spectre of previous winners lobbying home governments for greater FX 'flexibility' (depreciation) through new rounds of QE. All to match the deflationary competitive advantage already seen to work in America and now Japan.